Properties acquired from parents raise issues

By Paul Premack :
June 11, 2013

Dear Mr. Premack: My friend's mother deeded her several properties years ago, while my friend was (and still is) married. The properties are free and clear of any mortgages and do not have any liens. The Special Warranty Deed states with love and affection and other good valuable consideration. Is this considered inheritance and separate property or something else? No money was ever exchanged during this transaction. My friend's mother has since passed and my friend is concerned she may lose these properties if she divorces in the future. – CB

According to Texas law, any property acquired during a marriage is community property owned 50-50 by both spouses, unless the property was acquired 1) as a gift, 2) as an inheritance, or 3) under a contract in which both spouses agree on the character of the property. In those three instances, the property acquired is legally the separate property of the spouse named as owner.

Property is classified as inheritance when it passes through a trust or the probate of a Will, in fulfillment of the owner’s wishes at the time of death. Alternately, the deeds you describe would be classified as a gift from your friend’s mother to your friend, given while her mother was living. The words “love and affection” in the consideration clause are often used when making a gift. Because the transfers are classified as gifts:

1) The properties are your friend’s separate property. If she gets divorced, the court should award all her separate property to her;

2) Her mother would have been liable for any federal gift tax consequences of the gifts;

3) Unlike when someone inherits property through a will or a trust, your friend would have taken the same tax basis in the properties as her mother when she received them as gifts. If she decides to sell any of the properties, she’ll pay capital gain taxes on her profits.

Dear Mr. Premack: My mom and dad signed a Lady Bird Deed leaving their home to my sister and myself. My brother was left out because he owed the IRS and asked for his name to be left off the deed. Our parents died and my brother is living in the house. My sister decided to move to the house also, and wants to buy my 1/2 of the property. She is going through a Credit Union and says I have to co-sign the loan she’ll take to pay me because she has no collateral. I don't want to sign the loan but she says it is required. Couldn't she use mom’s home as collateral for the loan? Please give me some input as I have no idea what to do at this point. – SGT

Although allowed by Texas Law, a Lady Bird deed to pass property between generations is a tool to be used carefully and only when it is right for a specific estate plan. Your parents used the deed to make you and your sister co-owners of the house upon their deaths and to exclude their son because of his IRS troubles. Selling your share to your sister would end your co-ownership.

She lacks money to pay you, and wants you to cosign the loan. Look at the legality: if she defaults, you are contractually bound to repay the note. You receive no benefit if you repay the loan, but she still owns your half of the house. For that and many other reasons, you should refuse to cosign her loan. She must find a different way to get the loan. She could, as you ask, use your mother’s house as collateral. She may want to shop for the loan from various lenders until she finds one which would issue the loan using the house as collateral.

Whatever you – CB’s friend, SGT and sister -- decide, you all need to do your own estate planning, as your parents did. You each own property and have assets that call for careful planning. Make your decisions after seeking advice from a qualified attorney who will help you to consider all the options.

Paul Premack is a Certified Elder Law Attorney and a Five Star Wealth Manager (Texas Monthly Magazine 2009-2013) practicing estate planning and probate law in San Antonio. Submit estate planning, probate and elder law questions by clicking “submit a question” at www.premack.com, or go there to view the archive of his past legal columns.